According to a recent report from the International Air Transport Association (IATA), 2023 is when the airline industry is “expected to tip into profitability.” Taking current economic uncertainties into account, it anticipates $779 billion in global revenue this year.
Despite macro concerns, the IATA affirmed that airlines “cut their losses in 2022” and that “there are plenty of reasons to be optimistic about 2023.” Indeed, if pent-up travel demand continues like it has, and if fuel costs and inflation ease, airline stocks could see significant upside.
With that in mind, let’s take a look at two players in this space and determine which makes a better buy.
The case for JetBlue Airways
Since its April 2021 high just shy of $22 per share, JetBlue Airways (JBLU 0.85%) stock dropped more than 60% to its current price in the $8 to $9 range. As the airline industry recovers and demand for flights remains strong, is it time to buy the dip on JetBlue?
In a new Q4 record, the New York-based airline pulled in revenue of $2.4 billion to close out 2022. For the year, JetBlue also generated more revenue in 2022 than any year in its history.
In a major turning point for the airline, JetBlue made its “return to profitability” in the latter half of last year, CFO Ursula Hurley cited. Back in profitable airspace again, the airline anticipates 2023 to be its first full year of profitability since the pandemic. Hurley and associates now focus on growing net profit margin and optimizing earnings capabilities, amid “a more normalized backdrop this year.”
In spite of continued economic uncertainty and fuel price volatility, CEO Robin Hayes expects margins to reach pre-pandemic levels by the end of the year. Productivity enhancements, better maintenance, and fleet improvements are forecast to save JetBlue a combined $250 million through 2024.
The case for Alaska Air Group
From its April 2021 high north of $74 per share, Alaska Air Group (ALK 0.40%) stock declined more than 33% to its current price in the $49-$50 range. On the flip side, the stock has also gained 28% from its lows of last September.
Alaska Air drove $2.5 billion in revenue last quarter, a notable 11.3% increase over the same period in 2019. And the airline also achieved a pre-tax profit margin of 7.6%, which led the industry, according to COO Ben Minicucci.
For the year, the Seattle area-based airline delivered a record $9.6 billion in revenue — and on 9% less capacity. In other words, with 9% fewer passengers onboard, Alaska Air Group was able to generate 10% more revenue than in pre-pandemic 2019.
From an investor perspective, the potential for future growth appears massive. If Alaska Air can maintain its industry-leading margins while attracting more passengers, investors can look forward to seeing record revenue crystallize into record profit. But it will likely take some patience.
Fortunately for Alaska Air, estimates show a rise in capacity of 11% to 14% in Q1 alone, with full-year capacity up 8% to 10%. Although the airline still contends with heightened fuel costs and fleet-related expenses, pre-pandemic levels of capacity should help Alaska Air Group increase profitability.
Which airline stock is a better buy?
To determine which of these two airline stocks makes a better buy in today’s market, let’s compare their price-to-sales ratios, price-to-book ratios, and five-year compound annual revenue growth rates.
|Metric||JetBlue Airways||Alaska Air Group|
|Market capitalization||$2.8 billion||$6.3 billion|
|Five-year compound annual revenue growth rate (CAGR)||4.61%||4.09%|
Purely based on revenue, a company’s price-to-sales ratio can help investors determine if a company is undervalued or overvalued based on its current market capitalization. The smaller the ratio, the better.
A price-to-book (P/B) ratio of one indicates that a company’s stock price is aligned with its book value, while a P/B ratio less than one can mean a stock is undervalued. Conversely, a P/B ratio greater than one could imply that a company’s stock price is overvalued.
With a lower price-to-sales ratio, a price-to-book ratio less than one, and a slightly better five-year annual growth rate, JetBlue Airways currently makes the better buy over Alaska Air Group. But in a recovering airline sector, both of these stocks stand to take off in the near future.